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1)While stock selection is best approached from the bottom-up, ignoring the top-down can be extraordinarily expensive
1)While stock selection is best approached from the bottom-up, ignoring the top-down can be extraordinarily expensive. The bottom-up can also inform the top-down. As Ben Graham pointed out “True bargain issues have repeatedly become scarce in bull markets (James Montier) 2.1. Differentiate between the bottom-up and top-down approach to fundamental analysis.(3) 2.2. Do you think investors should choose between the two approaches, or do you believe that they are complimentary? (3)
2)
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Citee Corp. has no debt but can borrow at 6.8 percent. The firm’s WACC is currently 9.1 percent, and the tax rate is 21 percent. |
| a. |
What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | If the firm converts to 15 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | If the firm converts to 45 percent debt, what will its cost of equity be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d-1. | If the firm converts to 15 percent debt, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| d-2. | If the firm converts to 45 percent debt, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
3)Determine the capitalized cost of a research laboratory which requires Php 5,000,000 for original construction Php 100,000 at the end of every year for the first 6 years and then Php 120,000 each year thereafter for operating expenses, and Php 500,000 every 5 years for replacement of equipment with interest at 12% per annum. 4. There are 5 On-Going Projects valued at Php31.85 M. The acquisition cost for the land is Php2.28M. The transaction costs, including geotechnical, bulling plans & permits, registry of deeds and municipal documents, taxes, realty taxes, goodwill incentives, and among others, amount to Php920K. The Cost of Construction is Php12.5M. The Cost of Revenue was borrowed from 60% investors and 40% Home Development Mutual Fuld. Although both have 6% rate of interest per annum, the payment schedule are distinct. The tenor of payment for HDMF is 25 years while for the investors is 7 years. For the payment that will be made for investors, 2 years will be made monthly with interest only and 5 years will be made monthly with capital and interest. If the monthly potential income of the 5 projects is Php240,000 and the monthly expense is Php19,200, calculate the monthly Cash Flow of the projects.
Expert Solution
1)A. Bottom up investment is incline towards buying up stocks from the stock specific point of view and it will be determining the firm specific factor rather than macro factors and it will be trying to value the company according to the performance of the company and it will be taking into perspective the financial reports and the demand growth and the future performance of the company so it is related to determination of the value of the company from the firm specific factors.
Top down investment approach is related to making investment after analysing the Macro picture which will be determination of the overall economy and understanding the demand and supply in the bigger picture through analysis of the overall economy which will consider the macrotrends like changing economic cycles and changing monetary policies and the growth rate of the economy while making decisions regarding investment into a company so it is a macro analysis approach.
B. I believe they are complementary in nature and investors should be accounting for both the approach while making valuation of a company and investment decision because they should be trying to incorporate bottoms up investing which will be incorporation of the firm specific factors and it will also consider the overall macrotrends because company will always be a part of the economy and its performance will be relative to that of economy and it will be complementary in nature so they would be trying to always incorporate and synchronise the the macro and micro Trends before making a investment decision by incorporation of both the fundamentals of top-down and bottoms-up approach.
2)please see the attached file.
3)
You have asked multiple unrelated questions in the same post. I have addressed the first question. Please post the balance question, separately.
Q - 3
Original Construction cost, C0 = 5,000,000
Annual cost = C = 100,000 in annuity for 6 years.
Hence, PV of these costs, A = C/r x [1 - (1 + r)-n] = 100,000 / 12% x [1 - (1 + 12%)-6] = 411,140.73
Operating expenses from year 7 onwards = P = 120,000 in perpetuity
Hence, PV of perpetuity at the end of year 6 = P/r = 120,000 / 12% = 1,000,000
Hence, PV of these costs today, B = PV of perpetuity at the end of year 6 x (1 + r)-n = 1,000,000 x (1 + 12%)-6 = 506,631.12
Replace costs, Q = 500000 every 5 years
Hence, Present value of replacement cost, D = Q/[(1+i)k-1] = 500000/[(1 + 12%)5-1] = 655,873.88
Hence, the total costs to be capitalized = C0 + A + B + D = 5,000,000 + 411,140.73 + 506,631.12 + 655,873.88 = 6,573,645.74
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